Netflix Inc. (NASDAQ: NFLX) is the world's largest subscription-based streaming entertainment service. The company provides its services in over 190 countries to more than 270 million paid subscribers. The company sees a total addressable market (TAM) of 500 million that it expects to penetrate with operational fixes alone. The company has been at the forefront of the streaming video revolution since introducing it in 2007, with a tiny library of 1,000 films accessible only to broadband users. The adoption of ad-supported programming and bundling is paving the way for the next stage of growth for Netflix and streaming services in general.
Netflix operates in the consumer discretionary sector, competing and, at times, partnering with streaming entertainment giants, including The Walt Disney Co. (NYSE: DIS), Warner Bros. Discovery Inc. (NASDAQ: WBD), Paramount Global (NASDAQ: PARA) and Comcast Co. (NASDAQ: CMCSA).
Adding an Ad-Supported Tier Was a Game Changer for Netflix
For years, Netflix held out from ad-supported programming but finally caved in and accepted advertising by introducing an ad-supported tier in November 2022. This was a game-changer for the streaming service.
Advertising helped re-spark its growth, generating additional revenue streams from the cheaper membership rates and advertising dollars. What was considered a loss leader in attracting new members who would upgrade to the ad-free programming turned into a cash cow that helped boost both top and bottom-line growth.
The 3 Major Benefits of Netflix’s Ad-Supported Tier Subscription
Netflix gained three big benefits when they added an ad-supported tier subscription. First, it enabled Netflix to broaden its audience base and grow its membership by introducing a lower-price point alternative to attract budget-conscious consumers. Second, having an ad-supported tier reduces churn, as premium members who would cancel the service due to costs could trade down to the ad-supported tier membership. Third, an ad-supported tier enables advertising monetization to generate a whole new revenue stream for the company.
How Much is the Ad-Supported Tier Worth To Netflix?
Ad-supported members are worth an estimated $15.50 a month in revenues, which include advertising fees and the lower ad-tier “Standard With Ads” $6.99 monthly membership. Netflix raised its standard ad-free $11.99 plan to $15.49 while adding the cheaper $6.99 ad-supported plan.
Netflix has grown its ad-supported tier to over 40 million monthly active users, nearly doubling in two quarters. Netflix expects ad revenues to grow to over $4 billion annually.
Netflix Plans to Grow Even Larger Through Bundling
Netflix is also bundling its ad-supported tier with competing streaming services through a number of packages. Xfinity customers can get the Xfinity StreamSaver bundle, which includes Peacock, Apple TV, and Netflix's ad-supported plan for $15 per month. Verizon Communications Inc. (NYSE: VZ) offers several bundled packages, including the Netflix and NFL+ bundle for $25 per month, Netflix and Starz bundles for $23 per month, and Netflix and Max bundle for $10 per month (both ad-supported tiers only). Most of Netflix's bundled plans are for its ad-supported tier plan.
Netflix Scores with Bundling in 2 Ways
Bundling with competitors and broadband providers benefits Netflix in two ways. Netflix collects a portion of the bundling subscription fees. Most importantly, it gets exposed to a broader audience again, which can generate more advertising revenues as users view videos with advertisements. It also hopes to get upgrades from the bundled plan subscribers who decide they are sick of ads and choose to subscribe to their own Netflix ad-free plan. To parlay advertising, Netflix plans to launch its own advertising technology (ad tech) platform, enabling advertisers to buy ads through its ad-supported tier streaming service.
NFLX is Forming a Pennant Breakout Pattern
The daily candlestick chart for NFLX illustrates a pennant breakout pattern. The pennant is comprised of the flagpole, which is represented by the rising candlesticks from the $544.25 swing low on May 1, 2024, to the $664.25 swing high on May 20, 2024. The pennant formed from converging trendlines representing lower highs and higher lows. The breakout formed when NFLX surged through the upper descending trendline at $656.49. The daily relative strength index (RSI) is rising towards the 70-band, indicating buying pressure. Pullback support levels are at $656.49, $626.44, $604.43, and $579.00.
Netflix analyst ratings and price targets are at MarketBeat.
